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Silver Linings Seen in a Clouded Crystal Ball

Silver Linings Seen in a Clouded Crystal Ball

Past isn't always prologue, but by the time this year is over we might wish it were so for the economy.

This is not to predict that the current year will be much worse for the food distribution industry. It's just that at the moment, general business conditions and macroeconomic trends look far from robust.

Nonetheless, the industry has experienced a couple of strong years, which may provide some momentum going forward. Here's some of it: During 2006, sales increased, and there was a milestone event in the form of Supervalu's buyout of Albertsons. As 2007 got under way, predictions for the year were positive. Part of the reason for optimism about 2007 was that the conventional industry shook off its long stupor and was aggressively moving to recapture business lost over a long period to nonconventional formats.

Sure enough, 2007 did end with many positive notes being sounded. Among those notes was a fairly strong performance for food retailing stocks. To be sure, most stock valuations dropped off earlier highs by the time 2007 ended, but many finished with a net gain for the year.

Now, as 2008 starts to gain its footing, there are predictions that the new year may not treat the food distribution industry too roughly. One major operator, Safeway, is predicting it's poised for strong growth into the future because of its moves to organics and a new store format, among other initiatives (SN, Dec. 31). Safeway isn't alone in contemplating a new-format approach. As was pointed out in this space on Dec. 17, several operators have found some success with smaller-format stores. Should Tesco's Fresh & Easy format gain traction, we are sure to see further moves in that direction.

Moving toward a more critical metric — sales — you'll see in the front-page news article in this week's SN that several industry figures are predicting there will be at least stability in sales this year and that some increase is not out of the question.

Regrettably, the industry isn't insulated from the overall economy, which isn't looking so grand. Wall Street took another lashing as major indices fell in the first stock-trading day of 2008. The Dow Jones Industrial Average dropped 1.7%, its worst first-day-of-the-year performance since 1983. Stocks dove as more air was let out of the housing bubble and oil made its long-feared move above the $100-per-barrel mark.

The critical issue, though, is whether these factors will mean a slump for this year's food sales. They could, because these economic situations yield an increase in the cost of living, picking the pockets of consumers, which makes them uneasy and less willing to spend. Conversely, consumers may compensate for higher prices by traveling less and consuming more meals prepared at home, which could support sales at supermarkets. The direction food spending goes also will be governed in large part by the economy's ability to create and sustain employment. Should unemployment increase sharply this year, as some have predicted, the entire situation will become even more fluid.

In short, the new year is filled with many imponderables, but the outlook for food retailing isn't too bad. (For another look at 2008, see the column below.)